Will Shaving a Half Trillion Dollars from Medicare Save Money?

It depends.

The Medicare cuts will certainly save the federal government money – that’s why the Senate and House health care reform bills cut the deficit over the next ten years.   However, whether they lower the overall cost of health care really depends on whether resource costs are diminished, or whether costs are just shifted from Medicare to other payers.

Here’s a graphic from Tom Bodenheimer seven years ago, showing that Medicare has been very effective at lowering rate of health care inflation – a contrast to the sustained high rate of inflation of private health insurance premiums .

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Here is the counterpoint, also a graphic from Health Affairs, showing the estimated cost shift from Medicare (and Medicaid) to private payers. 

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So – will the half trillion in Medicare cuts lead to cost shifting to other payers?

David McGuire, VP for Contracting at Partners, is quoted in today’s Boston Globe  that low Medicare rates are the cause of high prices for non-Medicare patients. 

The Medicare cuts (from a memo from the CMS Actuary)

- Medicare Advantage Plans ($201billion)
- Provider payment cuts – adjusting for productivity increases over time ($282 billion)
- Pharmaceutical cuts ($129 billion)

Medicare Advantage cuts will likely lead to lower enrollment in the private plans, and increases in premiums and cuts in benefits for some beneficiaries.  This is not likely to create much cost shifting.

Provider payment decreases could mean increased cost shifting to the private sector.  It’s likely that this will lead to some substantial efforts to lower the cost of care delivery.  Note also that some provider fee cuts might just not happen.  The AMA has successfully pressed for reversal of physician fee cuts each year, and hospitals are now complaining that their agreed-to lower increases were contingent upon a more substantial decrease in the uninsured than would be accomplished under the current Senate bill.

Pharmaceutical cuts  are likely to lead to higher utilization – so overall costs might not decrease.  Assuming that the higher utilization is for cost-effective medications, we could be purchasing high value from the increased drug spend (but we probably won’t save money).

Health care cost increases are complex and multifactorial.    Large Medicare cuts could lead to higher value from health care delivery – but are not likely to lead to dollar-for-dollar decreases in overall health care costs.